New Mountain Finance Corporation 8.250% Notes due 2028 (NMFCZ) Q4 2019 Earnings Report, Transcript and Summary

Good day and welcome to the New Mountain Finance Corporation Fourth Quarter 2019 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Hamwee, Chief Executive Officer of New Mountain Finance Corporation. Please go ahead.

Thank you and good morning, everyone, and welcome to New Mountain Finance Corporation’s Fourth Quarter Earnings Call for 2019. On the line with me here today are John Kline, President and COO of NMFC; and Shiraz Kajee, CFO of NMFC. Our Chairman, Steve Klinsky is unable to join the call today, but will rejoin us on future calls. I’d like to by asking Shiraz to make some important statements regarding today’s call.

Thanks, Rob. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today’s call and webcast are being recorded. Please note that they are a property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our February 26 earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our press release and on Page 2 of the slide presentation regarding forward-looking statements. Today’s conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I’d like to turn the call back over to Rob Hamwee, NMFC’s CEO, who will give some highlights beginning on Page 4 of the slide presentation. Rob?

Thanks, Shiraz. Let me start by presenting the highlights of another solid quarter for New Mountain Finance. New Mountain Finance’s adjusted net investment income for the quarter ended December 31, 2019, was $0.36 per share above the high end of our guidance of $0.33 to $0.35 per share and more than covering our quarterly dividend of $0.34 per share. New Mountain Finance’s book value was down $0.09 to $13.26 per share reflecting generally stable financial market conditions and limited portfolio of company valuation changes. We’re also able to announce our regular dividend, which for this 32nd straight quarter, will again, be $0.34 per share and annualized yield of approximately 9.6% based on last Friday’s close. The company had another strong quarter of net deal generation investing $286 million in gross origination versus moderate repayments of $74 million. This continued balance sheet growth was in part funded by our October equity issuance and keeps us fully levered in our target range inclusive of some early Q1 repayments. Credit quality remains generally strong, although we did add one new historically troubled name to non-accrual this quarter, our first new non-accrual in a year and a half. I and other members of New Mountain continue to be very large owners of our stock, with aggregate ownership of 10.7 million shares. Finally, the broader New Mountain platform that supports NMFC continues to grow, with over $20 billion of assets under management and approximately 160 team members. In summary, we are pleased with NMFC’s continued performance and progress overall. Before diving into the details of the quarter, as always, I’d like to give everyone a brief review of NMFC and our strategy. As outlined on Page 6 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm. Since the inception of our debt investment program in 2008, we have taken New Mountain’s approach to private equity and applied it to corporate credit with a consistent focus on defensive growth business models and extensive fundamental research within industries that are already well known to New Mountain or more simply put, we invest in recession resistant businesses that we really know and that we really like. We believe this approach results in a differentiated and sustainable model that allows us to generate attractive risk adjusted rates of returns across the changing cycles and market conditions. To achieve our mandate, we utilize the existing New Mountain investment team as our primary underwriting resource. Turning to Page 7, you can see our total return performance from our IPO in May 2011 through February 21, 2020. In the nearly nine years since our IPO, we have generated a compounded annual return to our initial public investors of 11% meaningfully higher than our peers in the high yield index and approximately 900 basis points per annum above relevant risk-free benchmarks. Page 8 goes into a little more detail around relative performance against our peer set, benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have. Page 9 shows return attribution. Total cumulative return continues to be largely driven by our cash dividend, which in turn has been more than 100% covered by NII. As the bar on the far right illustrates, over the nearly nine years we have been public, we have effectively maintained a stable book value, inclusive of special dividends while generating a 10.2% cash-on-cash return for our shareholders. We attribute our success to: one, our differentiated underwriting platform; two, our ability to consistently generate the vast majority of our net investment income from stable cash interest income in an amount that covers our dividend; three, our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive, appropriately structured leverage before accessing more expensive equity; and four, our alignment of shareholder and management interest. Our highest priority continues to be our focus on risk control and credit performance, which we believe over time is the single biggest differentiator in total return in the BDC space. Credit performance continues to be strong, with material quarter-over-quarter credit deterioration only in the same name we called out last quarter, PPVA, which we have now decided to put on non-accrual. We were only accruing approximately $500,000 per quarter on this investment and therefore, this will not have a meaningful impact on NII and dividend coverage going forward. Furthermore, as this name has been troubled for a number of years, historical value diminution has been largely recognized previously. In this quarter, our mark moved from 0.74 to 0.71, a fair value change of $1.1 million. We’ve also decided to write-off $5 million of previously accrued, but unpaid PPVA interest income, which we recognized in 2016, 2017 and 2018. it is important to note that New Mountain Capital as manager this quarter will be reimbursing NMFC for all incentive fees collected on this income or $1 million. As mentioned last quarter, PPVA has effectively been an ongoing liquidating trust under Cayman law for a number of years. And as our one significantly troubled asset, we continue to spend a lot of time attempting to maximize our recoveries from the PPVA entity to state. Given the complex mix of underlying assets and litigation claims while we believe our valuation of $0.71 currently fairly reflects the midpoint of likely recovery scenarios, significant volatility exists around the midpoint. If you refer to Page 10, we once again, lay out the cost basis of our investments both the current portfolio and our achievement of investments since the inception of our credit business in 2008 and then show what has migrated down the performance ladder. Since inception, we have made investments of approximately $7.7 billion in 287 portfolio companies, of which only nine representing just $165 million of cost have migrated to non-accrual, of which only four representing $43 million of cost have thus far resulted in realized default losses. Furthermore, over 99% of our portfolio at fair market value is currently rated one or two on our internal scale. Page 11 shows leverage multiples for all of our holdings over $7.5 million when we entered an investment and leverage levels for the same investment as of the end of the most recent reporting period. While not a perfect metric, the asset-by-asset trend in leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical, fundamental support for our internal ratings and marks. As you can see by looking at the table, leverage multiples are roughly flat or trending in the right direction with only a few exceptions. There are currently only two names that represented by three different securities that have had negative migration of 2.5 turns or more, both of which have been discussed in previous quarters and have been previously restructured. The first is Edmentum, where operating results and enterprise value continue to meaningfully improve; and the second is UniTek, where a few operational missteps led to weaker financial results in 2019, but where secular trends continue to be strong in the company’s key operating division, providing us with optimism for improvement in 2020. The chart on Page 12 helps track the company’s overall economic performance since its IPO. At the top of the page, we show how the regular quarterly dividend is being covered out of net investment income. As you can see, we continue to more than cover 100% of our cumulative regular dividend out of NII, even after stripping out that now reverse PPVA accrual. On the bottom of the page, we focus on below the line items. First, we look at realized gains and realized credit and other losses. As you can see looking at the row, highlighted in green, we’ve had success generating real economic gains every year through a combination of equity gains, portfolio company dividends and trading profits. Conversely, realized losses, including default losses, highlighted in orange, have generally been smaller and less frequent, and show that we are typically not avoiding non-accruals by selling poor credits at a material loss prior to actual default. As highlighted in blue, we continue to have a net cumulative realized gain, which currently stands at $18 million. Looking further down the page, we can see that cumulative net unrealized depreciation, highlighted in gray, stands at $58 million and cumulative net realized and unrealized loss, highlighted in yellow, is at $49 million. The net result of all this is that in our nearly nine years as a public company, we have earned NII of $705 million against total cumulative net losses, including unrealized, of only $49 million. Turning to Page 13. We have seen significant growth in the portfolio over the last year as we’ve increased our statutory leverage. Consistent with this strategy, we articulated when we received shareholder authorization to increase leverage. more than 100% of the growth in assets has come from senior securities as through repayments and sales; non-first liens have actually shrunk on an absolute basis by $60 million, while first lien assets have grown by $1.2 billion. I will now turn the call over to John Kline, NMFC’s President, to discuss market conditions and portfolio activity. John?

Thanks, Rob. As outlined on Page 14, direct lending deal flow in our core sectors was strong in Q4 and for the year as a whole. Q1 deal flow has been somewhat weaker due to the normal seasonal slowness associated with the beginning of the year. We have seen some recent pressure on new issued loan spreads due to what we believe is a temporary supply and demand imbalance, which shouldn’t moderate as sponsors become more active in the coming months. We continue to see high-quality businesses trade at historically high multiples, often in the range of 15 times to 20 times EBITDA. Additionally, there continues to be a very strong trend in the direct lending market towards larger club deals. Over the last six months, we have seen multiple club financings over $1 billion, which we believe is a very positive trend for our business. While we acknowledge uncertainty around the coronavirus; looking forward, we expect transaction flow to improve in the coming months and we remained well positioned to select, underwrite and access the best deals available in the marketplace. Turning to page 15. Given our current asset liability mix, LIBOR has been a headwind in our business. in 2019, the market experienced a 90 basis point decline in three months LIBOR with an additional 20 basis point decline since the beginning of the year. While volatile, the forward LIBOR curve currently suggests that three month LIBOR could decline by an additional 50 basis points to 75 basis points in the coming quarters. Based on the sensitivity shown on page 15 if this does occur, declining LIBOR would represent a $0.015 to $0.02 per quarter earnings headwind. However, we continue to believe that if base rates migrate materially lower due to heightened risks in the economy, we will experience an offsetting increase in loan spreads, which together with our improved debt-to-equity mix and the continued ramp of our SBIC investing program, will enable us to maintain our target earnings level. Pages 16 and 17 show the NMFC had a very strong quarter with total originations of $286 million, offset by $117 million of sales and repayments, representing a $169 million increase in our portfolio. Our new investments were highlighted by a number of middle-market club deals and addition to our net lease portfolio and secondary purchase adding – purchases adding to existing positions. consistent with market trends that I discussed in my opening remarks, most of our additions to the portfolio are financings related to fresh buyouts trading at very healthy enterprise value multiples that are supported with historically high amounts of equity as a percentage of the total purchase price. These purchase price multiples, which have steadily increased over the past year, enhanced the loan-to-value ratios on our investments indicate strong sponsor support and validate the attractiveness of the defensive growth niches that we target. Our average loan-to-value on new originations in Q4 was 42%. on page 18, we report our annual origination track record, which again, shows over $1 billion of gross originations, a record level of nearly $800 million net originations driven by notably low repayments and sales. We expect that going forward; portfolio company-driven repayments will increase to a level more in line with historical trends. Page 19 shows our continued origination momentum since the end of the quarter, where we have invested $110 million in new transactions with $80 million of repayments. Notable post quarter-end transactions included large club deals for MRI Software and company X. acquisition-related financings for two existing portfolio companies and an add-on investment supporting the expansion of SLP III. Looking forward, we have a solid pipeline of new investment opportunities in our core defensive growth verticals. Turning to page 20. our mix of originations continues to skew meaningfully towards first lien loans, accounting for a 69% of total new originations this quarter. Our sales and repayments were also represented by first lien assets in roughly the same proportion. As shown on page 21, NMFC’s asset level portfolio yield increased by 20 basis points from 9.3% in Q3 to 9.5% pro forma for the positive change in the forward curve in Q4. While the forward LIBOR curve, which represents the expectation for future rates increased slightly in Q4, it has since decreased materially with the recent downward movement in rates. While we remain mindful of the potential continued volatility in the base rate, we are comfortable that our portfolio yield supports our quarterly dividends. The top of page 22 shows a balanced portfolio across our defensive growth-oriented sectors. In the services section of the pie chart, we break out subsectors to give better insight into the significant diversity within our largest sector. The chart on the bottom left of the page presents our portfolio by asset type, where you can see the shift towards first lien oriented assets that we discussed earlier in the call. Currently, only one third of our investments are junior in the capital structure. The chart on the lower right shows the majority of our portfolio is performing broadly in line with expectations. Finally, as illustrated on page 23, we have a diversified portfolio with our largest investment at 3.2% of fair value and the top 15 investments accounting for 32% of fair value. As you can see on the lower right side of the page, we have added more position diversity in each of the last four quarters to decrease our risk from any one borrower. We expect this trend to continue going forward. With that, I will now turn it over to our CFO, Shiraz Kajee to discuss the financial statements and key financial metrics. Shiraz?

Thank you, John. For more details on our financial results in today’s commentary, please refer to the form 10-K that was filed last evening with the SEC. Now, I’d like to turn your attention to Slide 24. the portfolio had approximately $3.2 billion in investments at fair value at December 31, 2019 and total assets of $3.3 billion, with total liabilities of $2 billion, of which total statutory debt outstanding was $1.7 billion excluding $225 million of drawn SBA-guaranteed debentures. Net asset value of $1.3 billion or $13.26 per share was down $0.09 from the prior quarter. At December 31, our statutory debt-to-equity ratio was 1.35 to 1. it is important to note that due to previously anticipated repayments received this year as of today, our statutory leverage is 1.28 to 1 putting us within our target range. On Slide 25, we show our historical leverage ratios, step up and leverage over the past seven quarters is in line with our current target statutory debt-to-equity ratio. on the slide, we also show our historical NAV adjusted for the cumulative impact of special dividends, which shows the stability of our book value since our IPO. On Slide 26, we show our quarterly income statement results. We believe that our adjusted NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line. We continue to generate stable net investment income above the line. Focusing on the quarter ended December 31, 2019, we earned total investment income of $77.9 million, an increase of $5.3 million from the prior quarter, primarily due to high interest income from the increased asset base. Total net expenses were approximately $43.5 million, a $2.1 million increase from the prior quarter to the higher borrowing cost and fees. As in prior quarters, the investment advisor continues to waive certain management fees. The effective annualized management fee this quarter was 1.28%. it is important to note that the investment advisor cannot recoup fees previously waived. This results in fourth quarter adjusted NII of $34.4 million or $0.36 for weighted average share, which is above our guidance and more than covered our Q4 regular dividend of $0.34 per share. inclusive of the previously mentioned $4 million net PPVA interest write-off associated with income accrued in prior years, our GAAP NII for the quarter was $0.32 for weighted average share. As a result of the net unrealized depreciation in the quarter, for the quarter ended December 31, 2019, we had an increase in net assets resulting from operations of $25.3 million. On Slide 27, I’d like to give a brief summary of our annual performance of 2019. for the year ended December 31, 2019, we had total investment income of approximately $281 million and total net expenses of $160 million. This all results in 2019 total adjusted net investment income of $121 million or $1.42 per weighted average. Our GAAP NII for the year was $1.38 per weighted average share, which more than covered our $1.36 regular dividend paid in 2019. in total for the year ended December 31, 2019, with total net increase in net assets resulting from operations of approximately $116 million. Slide 28 demonstrates our total investment incomes recurring in nature and predominantly paid in cash. As you can see, 94% of total investment income is recurring and cash income remains strong at 86% this quarter. We believe this consistency shows the stability and predictability of our investment income. turning to Slide 29, as briefly discussed earlier, our adjusted NII for the fourth quarter covered our Q4 dividend. given our belief that our Q1 2020 NII will fall within our guidance of $0.33 to $0.35 per share. Our board of directors has declared Q1 2020 dividend of $0.34 per share, which will be paid on March 27, 2020 to hold us a record on March 13, 2020. On Slide 30, we highlight our various financing sources. taking into account SBA-guaranteed debentures, we had over $2.2 billion of total borrowing capacity at quarter end. during Q4, we successfully upsized both our Deutsche Bank and NMFC credit facilities by $70 million and $50 million respectively. Additionally, we will prove by SBA to access an additional $75 million in debentures under our SBIC II program. As a reminder, both our Wells Fargo and Deutsche bank credit facilities covenants are generally tied to the operating performance of the underlying businesses that we lend to rather than the marks of our investments at any given time. Finally, on slide 31, we show a leverage maturity schedule. As we’ve diversified our debt issuance, we’ve been successful at lowering our maturities to better manage the liquidity. We currently have no near-term maturities. With that, I would like to turn the call back over to Rob.

Thanks, Shiraz. It continues to remain our intention is to consistently pay the $0.34 per share on a quarterly basis for future quarters, so long as NII covers the dividend in line with our current expectations. In closing, I would just like to say that we continue to be pleased with our performance to-date. Most importantly, from a credit perspective, our portfolio overall continues to be quite healthy. Once again, we’d like to thank you for your support and interest. and at this point, turn things back to the operator to begin Q&A. operator?

[Operator Instructions] The first question comes from Owen Lau of Oppenheimer. Please go ahead.

Good morning and thank you for taking my questions.

Yes.

So, for UniTek Global Services, it seems to us that you marked down the first lien debt to 89% and preferred to 86%. So, the spread was about 3%. Maybe, could you please explain why we don’t see a wider spread between the two? Thank you.

Yes. I mean, I think a lot of it has to do with the underlying yields on both the different tranches of debt. So, the junior tranche has a much wider yield. So, when we marked UniTek, we did create – if you go down the capital structure, the implied yield gets wider as it should. And so the difference really is just the coupons on the different pieces of debt.

Okay. Got it. And then another question you may still be a little bit early here, but do you see any early sign of impact from coronavirus fear on your portfolio complete? And how would you assess in Medicaid the potential risk here? Thank you very much.

Yes. Listen, it’s obviously something we’ve been thinking a lot about in the last few days. And you’re right; it’s too early to see anything in reported numbers or even in kind of flash KPIs. But when we think prospectively, if the coronavirus does have the impact, that certain folks think it might have and that markets are impounding that it might have. We do believe we’re very well positioned on a relative basis. We don’t have anything in the portfolio, that should be first order or even second order impact of coronavirus, right? We don’t have travel and leisure or we don’t have manufacturing supply chain issues, logistics, ships out at sea. So, we continue to believe the portfolio is very defensively constructed when you think about things like enterprise software, U.S. healthcare, some of the technology-enabled business services that make up the vast majority of our portfolio, those things should be directly impacted by coronavirus. And nor should they be directly impacted if coronavirus does in fact lead to an economic downturn, right. We’ve always said that we are atypically focused and if this is the catalyst that thesis we’ll find out, we feel quite good about our positioning in light of a turn to that.

All right. That’s it for me. Thank you very much.

Yes. Thank you.

[Operator Instructions] The next question comes from Finian O’Shea of Wells Fargo. Please go ahead. Finian O’Shea: Hi guys. Good morning. How are you? Just the first question on the non-accrual. Can you remind us of the – why the nature of the collateralized resell agreement? I’m sure it’s a simple answer there. More importantly, does this or how much does this probably weaker structure on the underlying play into your recovery scenario?

Yes. it really doesn’t play into the recovery scenario. We have a crystallized claim in there – in the court restructuring. So, we are well positioned there and there’s very little secure debt in the state ahead of our claim, but that the significant majority of all that secure debt has been paid off based on cash proceeds received. So, we are effectively sitting up at the top of the structure right now, a little bit ahead of us, but literally, single-digit millions. So, we’re in line to receive proceeds in the coming year as they come in here to begin working the claim down. Finian O’Shea: Okay. That partially answers my follow on. I was going to ask that it had been in court for at least there’s news out there from earlier last year. But I was going to ask you what was the non-accrual itself based on any – was this just the development of your ongoing assessment evaluation or was there – is there sort of a development in courts that may soon emerge that’s telling us where you’ll be? You kind of just answered that proceeds will start trickling in over the year. So, I assume what we’re at somewhat of a conclusion period.

I think inclusion is too strong. It’s probably – it’s Winston Churchill would say, it’s maybe, not the beginning of the end, but the end of the beginning. So, it’s still a multiyear process to play through and it moves in fits and starts, because there’s obviously a major criminal investigation around this whole procedure that obviously takes precedent over the civil litigation side. So, I don’t want to get too precise around timing, but we’re certainly making good progress and expect to have updates in the quarters ahead to help further refine. Finian O’Shea: Okay. That’s fair enough. Just a couple on the market. I think John mentioned the outlook for improving private equity deal flow. This – I’ve heard at least a couple managers with opposing views and there’s kind of concerns in the context of high multiples and late cycle concerns. So, I guess what would you say or how would you support the view of rebounding a buyout activity?

Yes. So I mean, I think a couple of factors, right? And then I’m going to put coronavirus to the side, right? And if that continues to explode, that has its own impact and we’re not trying to get that. So, we’ve got to put that to the side for a moment. But in an ordinary course market, I think the view is supported by a, we’re, we’re in that market every day as a private equity – major private equity sponsored buyer, seller of companies. So, we have a pretty well-informed view of the pipeline. And is it maybe, different folks, who are maybe, different industries. As I’ve said in the past, the market has sort of moved in our direction. There’s increasing flow in the areas that we focus on, but maybe, just a mix issue there. And then I think the other sort of macro thing that gives one confidence in the view is just the formation of capital and private equity that’s – that is really increased dramatically in the last couple of years, continues to increase bigger funds, more funds. And in the history of private equity, very, very, very rarely has anyone ever given back money. And as we know, there’s finite timelines to put those capital to work. So, for all those reasons, I think we have that competence again, coronavirus off to the side. Finian O’Shea: Yes. And then one final sort of related and perhaps more difficult question on spreads, so I think you had – one of you commented on a little bit of confidence that there’d spread-widening as well in the context of the forward LIBOR curve. But LIBOR has been sliding down for at least a year. So, I think it’s fair to say we’ve seen just a lot of return compression at least on mid-to-higher quality credits. So, would you – you’ve been indirect lending for awhile. Are you saying that the supply and demand is sort of balancing out here and things should level off?

So I mean, just factually, right. Last year, we saw, like you said, LIBOR compression over the course of the year as John highlighted, we did see modest spreads expansion over the course of last year. And that came to an abrupt end in January, where we’ve seen obviously again, pre-corona a meaningful rally in credit and therefore, compression in spread. So, for maybe, six weeks, Jan 1 through Feb 15, we did have sort of what is typically anomalous, which is both ongoing LIBOR compression and spread compression that anything can happen, but long-term that has never occurred. And there’s always seems to be some catalysts and maybe, now it’s coronavirus, but obviously, spreads are widening again, LIBOR continues to fall. So that’s why we – our experience, like you say, we’ve been accessed a long time is that for the long – in the long run, those two things don’t move – those two things are inversely correlated. And that was the case over 2019 and we’re sort of seeing it again, here after kind of six weeks of anomalous behavior.

The only thing I’d add is that when you think about spreads going down in treasuries to record low levels that clearly signals a risk aversion in the market. And so it’s just impossible for us to think that if there’s risk aversion in the marketplace generally, that spreads are going to go tighter. That just doesn’t make sense to us. So, risk aversion is going to be in wider spreads and that’s why we’re optimistic about wider spreads in the current environment. Finian O’Shea: Very well. That’s all from me and thank you for the color.

Yes, thank you.

The next question comes from Ryan Lynch of KBW. Please go ahead.

Hey, Ryan.

Hey, Rob. Good morning. First question has to do with your leverage. You had mentioned you guys are – now have access to additional $150 million of SBA debentures. Obviously, those don’t count towards your regulatory or statutory leverage on your balance sheet. And that’s where you guys usually – that’s where you set your leverage target at. Do you though, however, that’s real leverage that you guys are putting on your balance sheet? Do you guys take into consideration that the total debt-to-equity at all, does that play any sort of component of how to operate your business? Or are you guys just pretty much solely focused on that regulatory or statutory leverage ratio?

Yes. No, I mean it’s a good question. We do look at both. We prioritize the regulatory versus the absolute number. But on Page 25, we track both and haven’t been radical divergence, nor do we expect that and even as we ramp up beyond on SBA as the business has continued to grow, I wouldn’t expect the Delta between regulatory and an absolute leverage to be radically different than it’s been in recent quarters. There may be some slight fluctuations, but I wouldn’t expect those fluctuations to be overly material.

Okay. It’s helpful. And then kind of following up on your comments regarding LIBOR, LIBOR has come down a lot. It looks like it’s going to continue to trend lower going forward. You bet that in your comments, given your guys leverage profile and things like that, do you guys think – do you guys can support the dividend at this level and you guys are clearly done a fantastic job historically covered it. I’m just curious, is there any appetite to potentially shift if it comes to this shift anymore of your portfolio to more non-first lien assets. As I look at Slide 13, you guys have done a fantastic job of reducing those non-first lien assets as you guys have grown leverage as you talked about. But given the pretty dramatic move that we’ve had in LIBOR, it looks like it’s going to continue. Is there appetite if necessary to shift into more of those non-first lien assets?

Yes. I think it’s another good question. I think, we’ve obviously, like you said, moved a lot and we used to be, I think at our – at our peak, we were under 50% senior. We’re now 60% – high 60% senior. Could it come down to mid-60%? But it’s not going to go back to 50/50. I can tell you that. But a few percentage points around the edges, but only – only if we find from the bottoms-up securities that we – that fit with our kind of zero-loss underwriting standards. So, we’re going to – no matter what we do, we’re going to maintain the absolute discipline around underwriting. We’re not going to solve to a portfolio level yield and at the expense of taking on incremental risk at the asset level.

Okay. That makes sense. And then I have one more just kind of a higher level question on the coronavirus. I’m not going to ask, what do you think the impacts are on your portfolio companies? Because I think it’s just far too early and it’s far too fluid of a situation with so many unknowns and how this plays out? But what I do want to know is, what are the processes and steps that New Mountain takes us a platform to both monitor the global impacts of the coronavirus are having. and then specifically, how do you guys monitor that at your underlying borrowers, given that, as you’ve mentioned, but it’s not going to show up in any data for a while now. And it’s very fluid. So, how are you actually trying to monitor that though, with your specific borrowers?

Yes. So, I mean, at the platform level, we obviously it’s – it’s a critical issue. I do think, we actually have, I mean, we’ve had some internal conversations already. We actually have some pretty good insights, because of our very large footprint in healthcare. So, we have both. None of us around this table are epidemiologists. We actually have access to some of the very best minds in the space and as both, as just human beings and as investors, we care a lot about this and we’re, I think, able to track it as well as anyone. And like you said, there’s incredible uncertainty even when you talk to the best epidemiologist in the world, et cetera. So, I think from a platform level, we can stay quite well-informed. Now, taking that a layer down from the credit business into our borrowers is hard. I mean, right, we’re entitled to the information that we’re entitled to pursuant to our credit agreements. Now, most of our borrowers we have a real dialogue with and we are trying to ramp up the interaction with management, with the sponsors to have a qualitative more real-time overview as opposed to the backwards looking numbers. So, we’re doing everything in our power, but I don’t want to oversell what that can ultimately allow us to do. I’d take honestly most comfort – we’ve done this, as we’ve gone through our individual borrowers. If you look at them line by line and you say is this an entity that is legacy business model that is likely to be impacted assuming, eight, maybe, not the worst case, but a bad case of coronavirus and the answer for the most part is no. So, that is what gives me, I think in the team here, the most comfort.

Okay, that’s a good color and helpful. Those are all my questions. I appreciate the time today.

Great, thank you.

The next question comes from David Miyazaki of Confluence Investment Management. Please go ahead.

Hey, David.

Hi, good morning. Good morning. Thank you for taking my question. I didn’t want to let slip the – I think that investors have kind of expect you guys to handle things properly and treat shareholders the right way, but reversing the pic and your incentive income is a thoughtful thing for shareholders and even though you guys do that kind of thing all the time, I think it’s still something that should be applauded. So, thank you for doing that.

Yes. Thank you. Not a hard to do.

Well, we appreciate it. And I don’t want to sort of like beat a dead horse here too much, but kind of following up a little bit on what Ryan was talking about. A couple of things, the response in the public equity and debt markets to coronavirus has been so [indiscernible] in the middle market things tend to be a little lagged. But just probably, really early to see this yet, but kind of thinking through, for example, if you were to issue debt in the public markets, the spread would be wider. So, are you seeing any body language from banks and how they’re viewing credit facilities or how they might be viewing advanced rates? And then on the other side of things, I wonder if you could share some perspective that you have from the private equity side and it’s probably, I would think that that underwriters and investors on the private equity side would be considering the exposure to corona, and is it creating some pause in transactions? Does it have any impact on the way that valuations or leverage might be applied to private equity deals?

Yes. So, on the second part of that, on the private equity side and in the capital market, again, it’s moving so quickly and we’ve seen such a radical reaction if you, have you measure it, whether it’s the 10-year move, it’s, it’s looking at the mix, looking at 10% down in five days in the equity market. I think everyone’s reevaluating everything. So, the private equity typically moves in a timeframe of months. So, it’s – I think people are just kind of seeing day to day how things play out and it very well could impact valuations. It could impact leveragability, quantum of debt and rates on debt for sure, right. As I mean, John said, like, the risk appetites in the public markets decrease that is going to be reflected in the private markets for certain. But people are going to see how things develop. It’s not going to get whipsawed on a day-to-day basis. So, I think we’ll know a lot more in a couple of weeks as whether this is sort of a transient thing or whether this is a long-haul thing. In terms of our position as a borrower, we’re fortunate that based on both terming out the debt and having advanced rates that are not subject to market sentiment or even underlying prices of our assets, there’s really no changes nor we expect to see any changes. When we think about incurring future debt down the road, we’ll have to see. But we’re not looking to tap into that market anytime in the near to medium term other than opportunistically, if things got better and we could improve our foreign cost, of course. So, we’re really not exposed to that. But again, like any asset class, I would expect that there will be a reaction to some degree there.

All right, great. Thank you very much for that color.

Yes, for sure, David. Thank you.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Rob Hamwee for any closing remarks.

Great. Well, thanks everyone for the interest today. We appreciate it. We obviously, will be monitoring the markets very closely. So, it’s kind of a battle of time right now and we’ll be looking forward to updating folks in the weeks to months ahead. So, thank you and have a great day. Bye-bye.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.